The shifting sands of the COVID-19 contagion have reinforced the need to foresee - and adapt - to the demands of the new normal. It has required re-engineering and reinvention of the way of life at an individual level.
At the policy level, it has required a sustained drive to not just contain the pandemic, but also deal with the fallout of a decision that brought almost all economic activities to a standstill. To mitigate the contagion’s effects, the government is now focusing on a ‘self-reliant’ India by leveraging the strength of India’s growing domestic demand.
The five pillars – a stronger economy, better infrastructure, technology-driven system, vibrant demography, and growing demand – will position India on a stronger footing in the long run.
Refocus on infra
The National Infrastructure Pipeline, which will see an investment of more than 100 trillion rupees, will provide investors a platform to access information on projects and form public-private partnerships with the government. It will also help the government cushion the economy by boosting its spending, creating a multiplier effect and generating jobs. More than 6,500 projects have already been identified, which include the PM’s ‘Gramin Sadak Yojana’, Smart City Mission, and the Housing for All initiative.
The central bank has been pro-active in supporting entities such as NBFCs (non-banking finance companies), MFIs, HFCs (housing finance companies) – which together are the largest lenders to the real estate sector. The RBI’s (Reserve Bank of India) decisions to hold targeted LTRO (long-term Repo operation) of 500 billion rupees and conduct separate LTRO auctions of up to three-year tenure for a total of 1 trillion rupees at a floating rate are aimed at making cheap credit available.
Additionally, the government announced a liquidity package of 750 billion rupees for NBFCs under the ‘Atmanirbhar Bharat Abhiyan’. Under this, NBFCs, HFCs and MFIs will get liquidity support of 300 billion rupees, wherein the government will provide a full guarantee for investments in investment-grade debt papers of these companies. It will further provide a partial credit guarantee of 450 billion rupees for these entities.
These decisions are expected to reduce the risk aversion of investors towards these companies and help them tide over their liquidity mismatch.
Another focus area for the government has been the country’s SMEs. Collateral-free automatic loans worth 3 trillion rupees will be provided to these enterprises under the Emergency Credit Line Guarantee Scheme. Combined with the 200 billion rupee subordinate debt, these measures will go a long way in providing liquidity to stressed small and mid-sized businesses.
Goading banks to do their part
The RBI has been injecting liquidity into the banking system and preserving financial stability to mitigate the effects of the pandemic on the economy. Since March 25, the repo rate has been reduced twice – first by 75 basis points to 4.4 per cent in March and then to 4.0 per cent in May. The reverse repo rate has been reduced thrice – first by 90 basis points to 4.0 per cent in March, then to 3.75 per cent in April and subsequently to 3.35 per cent in May.
The aim was to discourage banks from passively depositing funds with the RBI, thereby spurring lending. Additionally, a special window under the Prudential Framework on Resolution of Stressed Assets has been introduced. This addresses borrower defaults under a normal scenario by providing a principle-based resolution framework. Under the special window, lenders are required to give an additional provision of 10 per cent on the post-resolution debt.
This would enable banks to restructure corporate loans, extend loan tenure, sanction additional credit and allow a moratorium of up to two years. For real estate corporates, these measures will help them tide over their short-term challenges and focus on timely project completion.
And housing for all
Continuing its momentum, the government opened a new investment class in the form of affordable rental accommodations for urban and migrant workers. Government-funded housing in cities would be converted into Affordable Rental Housing Complexes, and incentives would be given to the industry to build affordable units. Also, COVID-19 would be treated as an ‘Act of God’ and ‘force majeure’ can be invoked to secure a six-month extension of registration and completion timelines for projects whose RERA registration was expiring on or after March 25.
The government and the RBI have made timely interventions to minimize the impact of the pandemic. While these have certainly provided relief, the resilience of the real estate sector in the medium- to long-term could be a cause of concern, given that it is the second largest employer in the country after agriculture. However, we remain hopeful that more measures will be announced by the government to support the industry in the coming few days.
- Anshuman Magazine is Chairman and CEO (India, South East Asia, Middle East and Africa) at CBRE.